Retirement Planning Basics: Securing Your Financial Future

Why Retirement Planning Matters

Retirement planning is the process of determining retirement income goals, and the actions and decisions necessary to achieve those goals. It includes identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk.

Proper retirement planning is crucial because:

• People are living longer, meaning retirement savings need to last longer
• Social security benefits may not provide sufficient income
• Healthcare costs typically increase as you age
• The power of compound interest means starting early can significantly increase your retirement nest egg

When to Start Planning

The simple answer to when you should start planning for retirement is: as soon as possible. The power of compound interest means that even small amounts invested early in your career can grow significantly over time.

Consider this example: If you start saving $500 per month at age 25 with an average annual return of 7%, you'll have approximately $1.2 million by age 65. If you wait until age 35 to start saving the same amount with the same return, you'll have only about $567,000 by age 65—less than half the amount!

However, it's never too late to start. Even if you're closer to retirement age, creating a plan can help you make the most of your remaining working years and adjust your expectations and lifestyle accordingly.

Calculating Your Retirement Needs

Determining how much you'll need for retirement involves several considerations:

Replacement Rate

A common rule of thumb is that you'll need 70-80% of your pre-retirement income to maintain your standard of living in retirement. This percentage may be higher or lower depending on your planned retirement lifestyle and expected expenses.

The 4% Rule

Another approach is the 4% rule, which suggests that if you withdraw 4% of your retirement savings in the first year and then adjust that amount for inflation each subsequent year, your savings should last approximately 30 years.

Using this rule in reverse, you can estimate your needed retirement savings by multiplying your desired annual retirement income by 25. For example, if you want $60,000 per year in retirement, you would aim for a retirement savings of $1.5 million ($60,000 × 25).

Life Expectancy

Consider your family history and personal health when estimating how long your retirement might last. With increasing lifespans, it's prudent to plan for a retirement of 30 years or more.

Healthcare Costs

Healthcare can be one of the largest expenses in retirement. According to estimates, a 65-year-old couple retiring today might need approximately $300,000 saved (after tax) to cover healthcare expenses in retirement.

Inflation

Remember that the purchasing power of your money will decrease over time due to inflation. Historical average inflation is around 3% annually, meaning prices roughly double every 24 years.